Daily Comment (July 10, 2020)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Good morning and happy Friday!  Being Friday, there is a new Asset Allocation Weekly, associated podcast and chartbook, all available for the weekend.  U.S. equity futures and global equities are taking a breather.  Conditions with China continue to deteriorate.  It looks like another round of fiscal spending is on the way.  There are growing worries about the pandemic’s resurgence weakening economic growth and it is also affecting the capital/labor tradeoff.  At the same time, it isn’t all bad news.  Gold and lumber have been doing quite well.  We update foreign news and COVID-19.  Let’s run through the tape:

China news:

  • The U.S. has formally sanctioned high-ranking Chinese officials over Xinjiang. Overall, four officials were named, including Chen Quanguo, the CPC secretary of Xinjiang.  Three of the officials will be banned from entering the U.S.; China has not responded yet, but we fully expect retaliation.
    • As an aside, we remain surprised that both sides continue to support the Phase One trade deal. We suspect the arrangement is under threat and have noted that China is well behind its targets.  However, a formal rejection of the deal would have a negative ripple effect on financial markets, leaving it abundantly clear that relations were in trouble.
  • The long arm of the dollar is showing its power with relation to Hong Kong. S. and European banks are conducting audits of their clients to see if any are controlled by Chinese or Hong Kong officials that are at risk of being sanctioned.  It is expected that relations with these clients will be severed to avoid losing access to dollar markets.
    • We are seeing a dual system developing in technology. It looks like a dual system of finance may not be far behind.  In terms of finance, China will have a hard time competing with the universality of the dollar and the deep U.S. financial system.
  • A recent roundtable discussion noted that Chinese companies listed in the U.S. continue to vary from U.S. auditing standards. It is almost impossible to avoid the risk of non-compliance in passive products, leaving U.S. investors unwittingly exposed to financial reporting issues.
  • Iran is cozying up to China; this action will almost certainly add to pressure from U.S. lawmakers to add sanctions on China.

Policy news:

  • Treasury Secretary Mnuchin is working with Congress for another stimulus bill. Most of the current measures expire at the end of July.  Expect the bill to adjust the unemployment payments.  The $600 per week flat payout won’t be extended.  We would expect the payment to be a mere replacement of lost income with some additional support for workers in industries hardest hit.  Whenever you make a blanket payout, there will be externalities introduced.  However, it should be remembered that in the initial package, due to the uncertainty, the $600 per week extra cash made sense.  It also makes sense to adjust the program to make it less attractive to stay home.  At the same time, another round of stimulus checks is highly probable.

Market and Economy news:

  • The meatpacking industry has been hit hard by COVID-19. Workers operate in close quarters, in cold conditions, that seem to allow for the spread of the virus.  In response, the industry is looking to increase automation, which would reduce the number of workers and perhaps allow them to work in less-contained environments.  The pandemic has introduced new trends in the economy, including work-from-home, cashless payments and increased use of store pickup.  What we are seeing in meatpacking is consistent with what we are seeing across the economy.
  • The IEA reported that global oil supply fell 2.4 mbpd in June to a nine-year low of 86.9 mbpd. Global consumption fell 16.4 mbpd in Q2.  The IEA is expecting both supply and demand to rise next year, but both are dependent on the path of the post-pandemic recovery.
  • In addition to strong equity markets, two commodities have been doing very well, precious metals and lumber. The former is benefiting from low to negative interest rates around the world and the expansion of central bank balance sheets.  The latter is enjoying a boost in demand; as we are stuck at home, we are apparently doing more projects that include lumber.  We are also seeing a surge in homeownership rates as the millennial generation move into their homebuying years.  That will likely lead to an increase in homebuilding that could get supported by telecommuting, which would encourage younger households living in exorbitant tax rate states to consider relocating to lower cost venues.
  • Chinese equities have been rising recently, supported by state efforts to encourage stock buying. Authorities in China are apparently worried that things are getting out of hand.  Two state-owned funds sold stocks this week to cool prices.
  • In recent years, we have seen steady stock buybacks that have led the S&P 500 divisor to fall, despite a long bull market. Essentially, despite rising equity values, companies tended to withdraw more stocks from the market than were added either by IPOs or by new issuance.  That isn’t what we are seeing now.  Companies are taking advantage of the market strength to issue new shares; the issuance will likely weigh on stocks.  If the divisor rises, it lowers the earnings per share, all else held equal.
  • California has belatedly joined an antitrust lawsuit brought by state attorney generals against Google (GOOGL, 1518.66). Since the company is headquartered in the Golden State, there has been reluctance to join the effort.  The fact that California has joined is not good news for the company.

Foreign news:

COVID-19 The number of reported cases is 12,294,117 with 555,531 deaths and 6,760,631 recoveries.   In the U.S., there are 3,118,168 confirmed cases with 133,291 deaths and 969,111 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.


  • The WHO has finally capitulated and confirmed that COVID-19 can spread through droplets suspended in the air. This fact makes large, crowded indoor gatherings particularly dangerous.
  • Bolivia’s president has tested positive for the virus.
  • A German biotech firm, BioNTech (BNTX, 65.61), says it will likely have a vaccine ready for regulatory approval by year’s end.
  • On the topic of vaccines, we are seeing a disturbing trend in vaccine nationalism that could end up causing problems. For example, if a country decides to only support its “national champion” to the exclusion of all others, it could lead to that nation not getting timely vaccine supplies if another nation gets there first.
  • The U.S. appears to be inadvertently engaging in the development of herd immunity. By allowing the virus to spread among younger people, more are becoming infected.  If contracting the virus leads to some level of immunity, it might make sense to do so.  However, it still isn’t clear how much immunity an infected person retains.  Another problem is that if a nation decides to go the route of establishing herd immunity, it should put policies in place to protect the most vulnerable; that really hasn’t happened on a national level.
  • Iran claims it has used drugs designed for Hepatis C as an antiviral treatment for COVID-19. The two drugs, sofosbuvir and daclatasvir, appear to have reduced symptoms of the virus in three trials with control groups.

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